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‘A unique opportunity’: Why calls are growing for new rules to protect ‘nature markets’

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A new report has pinned the overall value of nature markets at a huge $10tr – but will it cut through with decision makers at COP15?

The launch of the UN biodiversity talks in Montreal this week has prompted yet another report that attempts to put a financial value on the services nature provides to the global economy.

The, study published by the Taskforce on Nature Markets group this morning, pins the value of”nature markets” at almost $10tr a year, a figure which amounts to roughly 11 per cent of global GDP.

The report, produced with help from McKinsey sustainability analysis outfit Vivid Economics, identifies two dozen markets that are explicitly base on the valuing and trading of nature, ranging from emerging markets such as carbon and biodiversity credits and nature liability insurance to more established markets such as conservation, nature-related tourism, and soft commodities.

The findings were framed by NatureFinance, the group behind the task force, as proof of the need to enhance governance of these so-called nature markets through cross-jurisdictional governance and regulation. The group has warned that embedding rules and incentives in these markets that protect nature are in the interest of the global economy, noting they are likely to lead to improvements on the bottom line for both public and private sectors.

The findings add to a library of reports published recently that have sought to either put a price on nature’s services or highlight the economic benefits they bring and the risks associated with their destruction. NatureFinance analysis is notable, because it specifically explores the role nature plays in the trajectory of 24 specific markets, from agricultural and livestock to nature-based carbon credits.

Jason Eis, executive director of Vivid Economics, said the findings highlighted the need to ensure that governance of these markets benefits nature. “The key is market governance and market infrastructure including features like rules of trade, product and certification standards, taxes and subsidies which could potentially help drive incentives for companies to support nature in responsible ways,” he said.

The Global Biodiversity Framework (GDF) under discussion at COP15 sets out a number of measures around how global systems of governance and finance can be reformed to better protect nature and close a massive $700bn annual biodiversity financing gap by 2030. Target 14 calls for biodiversity values to be integrated into policies, regulations, planning, development processes, poverty reduction strategies, accounts, and assessments of environmental impacts at all levels of governance. This integration of nature into policymaking dovetails with the aim of Target 19 in the draft text, which calls for a rapid acceleration in both public and private finance towards nature conservation and remediation, in particular in the Global South.

Simon Zadek, co-lead of the Taskforce Secretariat and executive director of NatureFinance, said it was critical that funding for biodiversity was not limited to foreign aid. “By redesigning nature

markets to include nature positive instruments and policies in their governance, we can include a broader array of financial tools and move beyond Official Development Assistance (ODA) as the principal source of biodiversity funding,” he said. “We have a unique opportunity to reshape the core logic of these markets so that nature positive, net zero and equitable outcomes are built into the way they operate.”

The start of the COP15 Summit this week has also been accompanied by the launch of a number of new products designed to help companies and investors track and reduce their exposure to nature-related risks or quantify the benefits generated by nature-positive investments.

For example, a new ratings agency launched by the African Leadership University’s School of Wildlife Conservation (ALU’s SOWC), consultancy firm Dalberg, and FSD Africa Investments is aiming to help investors measure, rate, track and communicate the positive impacts their investments have on biodiversity.

The new Biodiversity Investment Rating Agency is set to advise investors on identifying the opportunities for impact investing in biodiversity-related projects, spotlighting relevant frameworks to measure biodiversity investment impacts. “Institutional investment in biodiversity as an asset class will be the key to unlocking the billions of private capital we need to address climate change and promote the business of conservation,” said Mike Musgrave from the SOWC.

Anne-Marie Chidzero, CIO at FSD Africa Investments, said the Biodiversity Investment Rating Agency would “help investors measure and track the impact of their capital on biodiversity conservation and restoration will play a central role in increasing investment in the sector”.

Meanwhile, British start-up NatureMetrics has this morning announced the launch of a new nature performing monitoring service for companies, designed to help them continually monitor their impact on nature.

“By launching the world’s most accurate nature performance monitoring system, companies across the globe will have one simple-to-deploy tool, enabling them to understand, track and improve their natural capital,” said Katie Critchlow, CEO of NatureMetrics. “Through cutting edge environmental DNA technology, we’ve devised a way of turning complex nature data into simple and meaningful metrics to inform board room level decisions for business and nature.”

Attempts to measure and price nature remain controversial in some quarters, and the surge of new products and reports that frame nature as an asset class or cluster of markets will be met by criticism from some green groups as the talks get underway in Montreal. Some campaigners have long argued that appealing to companies and countries’ financial self-interest panders to the root cause of the destruction of nature – the pursuit of economic growth. There is also a debate around whether the focus on environmental risk disclosures and measuring natural capital is inadvertently helping companies to defer actions that can deliver a more nature-positive world.

The counterargument, of course, is that quantifying nature’s services can drive change rapidly and at scale, because translating natural assets into financial terms will inevitably hit home with governments and in boardrooms. There is also strong sense among companies that the introduction of nature risk reporting into financial accounts is an important first step in their journey towards becoming nature-positive operations and giving investors insights they need to divert capital towards greener businesses. More than 300 companies have expressed their support for any deal reached at COP15 to include rules that would make nature risk reporting mandatory at large companies and financial institutions.

At any rate, NatureMetrics headline $10tr figure for the value of nature markets is clearly designed to shock governments and businesses assembled at COP15 into delivering a deal that can secure future economic growth by protecting nature. Delegates should take note.

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10 key takeaways from COP27 on nature’s critical role

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  • COP27 may be over but its impact will be felt for many decades to come.
  • Discussions highlighted nature’s pivotal role in tackling the climate crisis.
  • Here we reflect on 10 areas where progress is being made on climate action.

The implications of COP27 will likely be felt for decades to come, for better or worse. While a broad range of analysis has already been published on the ultimate outcomes of COP27, this summary includes reflections on how nature was the stand out topic at COP27 – here are the top ten takeaways.

1. Calls for structural reform of finance for nature and climate

It was impossible to pass a day at COP27 without having a conversation about finance – but finance means different things to different people. The breakthrough on loss and damage funding made the headlines, but this year there was much attention on structural reform of the financial system as well as the need to create innovative mechanisms that support nature and climate outcomes at national and ecosystem levels.

The Bridgetown agenda remained a central theme within these discussions. Before COP27, there was much focus on the need for financing adaptation measures – although in fact, very little progressed on this agenda from Glasgow. The multilateral development banks are also under scrutiny – sovereign bonds and sustainability-linked loans and bonds have been high on the agenda. Leading financial institutions from Japan to Norway to Brazil, all signatories to the Financial Sector Commitment on Eliminating Commodity-driven Deforestation have been moving forward with implementation through the Finance Sector Deforestation Action (FSDA) initiative.

FSDA members have published shared investor expectations for companies, and they are stepping up engagement activity and are working with policymakers and data providers. More broadly, the 10 point plan for financing biodiversity moved ahead at COP27 with a ministerial meeting between 16 countries representing five continents to set a pathway for bridging the global biodiversity finance gap – and looking ahead to the biodiversity COP15 in December 2020.

2. Biodiversity COP15 looms large

The biodiversity COP is usually a distant cousin to the climate COP, but in Egypt there was a considerable amount of attention on the need to create a “sister agreement” – a Paris moment for nature. The messaging that the climate and nature crises are deeply linked was made loud and clear at COP27.

On Biodiversity Day, the Paris climate champions urged leaders to step up action to address the accelerating loss of nature by delivering an ambitious biodiversity agreement at COP15 in Montreal. On the same day, more than 340 civil society leaders called on governments to prioritise the biodiversity COP, and a new survey from more than 400 experts from 90 countries revealed that a shocking 88% believe that the state of the world’s nature is “alarming” or “catastrophic and potentially irreversible”.

However, even though many countries were pushing for COP15 to be included in the COP27 text, the attempt failed – a disappointing outcome as net-zero emissions will not be enough to limit rapidly rising temperatures. Governments also need to halt and reverse biodiversity loss by 2030.

3. Strong signs of political will for forests

The creation of the Forest and Climate Leaders’ Partnership (FCLP), announced at the World Leaders’ Summit, is being driven by the reality that there is no time to lose when it comes to halt and reverse forest loss by 2030, with the intent to demonstrate success by COP28. The leaders of the 28 – and counting – FCLP member countries serve as key actors in the partnership, and its ultimate priority setters.

The FCLP will hold regular meetings, including leader-level moments at the beginning of climate COPs to encourage accountability. Starting in 2023, the FCLP will also publish an annual Global Progress Report that includes independent assessments of global progress toward the 2030 goal, as well as summarising progress made by the FCLP itself, including in its action areas and initiatives.

The presence of Brazil’s president elect, Luiz Inacio Lula da Silva, put a spotlight on the Amazon at COP27 – with Brazil promising to prioritise stopping deforestation and offering to host COP30 in three years’ time. Also, an announcement by Brazil, Indonesia and the Democratic Republic of Congo – made in Indonesia ahead of the G20 – signalled their intentions to work together to protect their vast swathes of tropical forests, earning the nickname “the OPEC of rainforests”.

This chart shows the total hectares of forest that have been destroyed in different countries. Source: Statista.

This chart shows the total hectares of forest that have been destroyed in different countries. Source: Statista.

4. Implementation of forest pledges

Coming into COP27, there were clear signs that the global community is not yet on track to halt and reverse forest loss and degradation by 2030. Another UN-led report found that for 2030 goals to remain within reach, a one gigaton milestone of emissions reductions from forests must be achieved not later than 2025, and yearly after that, but that current public and private commitments to pay for emissions reductions are only at 24% of the gigaton milestone goal.

However, it wasn’t all bad news on the implementation front. Nature4Climate’s new joint commitment tracker found that 55% of the commitments tracked are demonstrating substantial signs of progress. There are also some bright spots to celebrate. For example, tropical Asia is on the path toward reversing forest loss by 2030: Indonesia’s deforestation rate dropped by 25% last year, and Malaysia also reported a fall of 24% in the pace of forest loss last year.

Forest pledges made in Glasgow at COP26 were also in the spotlight. In 2021, $2.67 billion was put towards forest-related programmes in developing countries – 22% of the $12 billion pledged at COP26, meaning that donors are on track to deliver by 2025. Private sector funds are also moving: for example, one year after launch, the IFACC initiative is scaling innovative financial mechanisms to help farmers without further conversion of the Amazon, Cerrado and Chaco ecosystems.

 

So far, commitments have risen from $3 billion to $4.2 billion and disbursements are expected to exceed $100 million this year. Similarly, the public-private LEAF Coalition has mobilised an additional $500 million in private finance, bringing a total of $1.5 billion in support of tropical forest protection. This is part of $3.6 billion of new private finance announced at the climate summit.

And exciting private sector initiatives worth noting include the launch of a new company Biomas (by Suzano, Santander, Itau, Marfrig, Rabobank and Vale) to restore 4 million hectares in the Amazon, the Mata Atlantica rainforest and the Cerrado. Also, 1t.org announced pledges from its first four Indian companies (Vedanta, ReNew Power, CSC Group and Mahindra) to join 75 other companies worldwide committed to planting and growing 7 billion trees in more than 60 countries.

5. Nature of negotiations

In the negotiations, nature-based solutions were included in the COP27 text for the first time, with forests, oceans and agriculture each having their own section. The Koronivia Dialogue – the track where food and agriculture is discussed at the UNFCCC – has finally been included in the text, but all eyes turn to COP28 for the focus required to truly transform food systems.

In the wonderful world of Article 6, things remain complex. Last year, at COP26 in Glasgow, countries decided on the basic framework of Article 6. Throughout 2022, countries have been focused on how to operationalise the Article 6 mechanism that allows countries to actually begin trading. In Egypt, the discussions were very technical – such as how registries are going to work, how countries will report on the trading, and what information should be submitted –with the aim of making things easy to track.

For nature, it was decided at COP26 that land use emissions were part of Article 6 – as it includes all sources and sinks. The focus in Egypt has been on article 6.4 – the mechanism for developing guidance on activities involving removals which includes reforestation, restoration, afforestation etc.

6. Technology meets nature

In a similar way to finance, “tech” gets everywhere at climate COPs, although historically that is not really the case when it comes to nature – not this year however. In Egypt, the need for high-tech solutions for nature and climate challenges was a constant refrain. The role of tech in improving transparency and accountability in monitoring supply chains (and tackling deforestation) and also in enhancing the integrity of carbon markets was evident everywhere.

Notable developments include Verra’s partnership with Pachama to pilot a digital measuring, reporting and verification platform for forest carbon. A new Forest Data Partnership was announced by WRI, FAO, USAID, Google, NASA, Unilever and the US State Department. WRI’s Land and Carbon Lab was on show demonstrating the new frontier of measuring carbon stocks and flows associated with land use.

Nature4Climate demonstrated a beta version of its new online platform (naturebase) to help decision makers implement natural climate solutions. And the new Global Renewable Energy Watch – a partnership between The Nature Conservancy, Microsoft and Planet – was also demonstrated. Capturing this emerging trend, Nature4Climate and Capital for Climate launched a report on the size and potential of the whole “nature tech” market that was discussed at an event in the Nature Zone.

7. Food finally arrives on the scene

Food was on everyone’s mind at COP27 in Egypt – but for the first time, it also made it onto the main agenda – being recognised in the final text and also with at least five event spaces solely dedicated to food and agriculture.

Important developments included the Food and Agriculture for Sustainable Transformation Initiative (FAST) launched by the Egyptian COP presidency – a multi stakeholder partnership to accelerate access to finance, build capacity and encourage policy development to ensure food security in countries most vulnerable to climate change.

Also related to food, 14 of the world’s largest agricultural trading and processing companies shared their roadmap to 1.5℃ – to mixed reactions – with detailed plans on outlining how they will remove deforestation from their agricultural commodity supply chains by 2025.

8. An increasingly blue COP

Observers have expressed encouragement at this being “an increasingly blue COP”, with the ocean called out in the final declaration and the first ever ocean pavilion in the blue zone. Several declarations reinforced the recognition of the fundamental role of the ocean in the climate system.

The Egyptian presidency, Germany and IUCN launched the ENACT initiative (Enhancing Nature-based Solutions for an Accelerated Climate Transformation). The Mangrove Breakthrough was launched to protect 15 million hectares of mangrove globally by 2030. And the High Quality Blue Carbon Principles and Guidance were also announced.

9. Indigenous peoples and local communities

The critical role that Indigenous peoples and local communities (IPLCs) play as guardians of the forest is now firmly established and beyond question. At COP27, there was a polite but palpable frustration from IPLCs that climate funds are not reaching them. This massive deficit is increasingly being acknowledged by both by Indigenous and non-Indigenous actors, with a wide range of events dedicated to this topic.

While COP27 was a good space for Indigenous and non-Indigenous actors to share knowledge, to listen deeply to one another, to build relationships, it clearly can’t be the only space. While there are a number of encouraging signs of progress, including linking IPLCs with high-integrity markets, it’s clear the clock is ticking and IPLCs are getting impatient.

Clearly we must act with urgency, but it’s critical to take the time to build trust and mutual understanding, including absolute adherence to free, prior and informed consent protocols. This is necessary so that IPLCs can decide (or not) to participate in carbon markets with transparency, full understanding, and free consent. This takes time.

10. African-led initiatives take centre stage

While this was not the “African COP” that many hoped it might be, there were still a range of significant announcements coming out of Egypt that highlighted the continent’s potential as a natural capital powerhouse. These included the launch of the Africa Carbon Markets initiative, the Declaration for the Africa Sustainable Commodities Initiative, the launch of a $2 billion African restoration fund, a funding boost for Africa’s visionary Great Green Wall initiatives, and the announcement by the Global EverGreening Alliance and Climate Impact Partners of a new partnership to up to $330 million in community-led removal programs across Africa and Asia.

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New Report – Innovative Finance Is Essential To Tackle Barriers To Investment In Africa’s Climate Finance Needs

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At An Average Investment Of USD 250 Billion Annually From 2020 To 2030

The African continent presents a massive investment opportunity for investors to advance the deployment of climate solutions in the coming decade according to a new report Climate Finance Innovation for Africa. However, this will require innovation in financing structures and the strategic deployment of public capital to ‘crowd-in’ private investment at levels not yet seen.

Current levels of climate finance in Africa fall far short of needs. Africa’s USD 2.5 trillion of climate finance needed between 2020 and 2030 requires, on average, USD 250 billion each year. Total annual climate finance flows in Africa for 2020, domestic and international, were only USD 30 billion (CPI forthcoming), about 12% of the amount needed.

Barriers related to shallow financial market depth, governance, project-specific characteristics, and enabling skills and infrastructure have stifled private investment in African climate solutions to date.

To overcome these challenges will require innovation in financing structures. But there is no one-size fits all. Public and private investors must tailor their financial instruments and strategies depending on the acute or chronic nature of the barriers identified.

Recommended actions for increasing deployment of innovative finance include:

  • Identify and understand barriers constraining finance by sector and geography. Private investors must have the data to assess the risks affecting each investment decision based on its geographic and sectoral context. Building on their role as a catalyst for change, public investors should then deploy capital in a targeted way to address the specific barriers constricting private investment.
  • Match instruments with barriers. Public and private investors must tailor their financial instruments and strategies depending on the acute or chronic- nature of the barriers identified. The framework developed in this CPI study can serve as a toolbox for investors to access when reviewing investment opportunities in climate solutions.
  • Match instruments with project and technology lifecycles. As climate investments are typically long-term opportunities, investors must look to deploy different financial instruments and strategies in direct response to lifecycle-dependent considerations.
  • Enhance engagement and co-financing with local stakeholders. International private and public investors must work in collaboration with local stakeholders. This can help build capacity among local investors and inform targeted action by governments to improve investment performance.
  • Support innovation by establishing conducive policy and regulatory frameworks. Governance barriers remain one of the key impediments to sourcing climate finance in Africa. Most importantly, policymakers and regulators can foster climate finance innovation by adopting policy frameworks and long-term roadmaps.

This work provides a framework for how these instruments and strategies can be efficiently deployed to overcome barriers to finance and capitalise climate solutions in Africa. Real-world examples include:

  • TerraFund for AFR 100 has deployed a standardized process to deploy early-stage catalytic finance and technical assistance to spur the growth of grassroots innovators operating in the challenging land restoration sub-sector. It has mobilized USD 20 million in its initial round of investment, doubling the fundraising target it set out to raise over three years in 2020.
  • The Sub-National Climate Finance Initiative’s use of blended private equity and technical assistance to overcome the project and governance barriers facing investment in mid-sized climate infrastructure projects. To date, it has secured USD 150 million in funding for its blended equity fund.
  • Revego Africa Energy’s strategy of aggregating a diversified portfolio of operating renewable energy assets into Africa’s first YieldCo to attract investment from key/blue chip institutional investors. With support from a public-private partnership between Macquarie and the UK Government, Revego has secured institutional capital from one of the largest pension funds in South Africa.

This brief provides an overview of financial and non-financial solutions to address sector specific barriers. It provides six groups of practical instruments: non-tradable finance instruments; capital market instruments; result-based finance instruments; risk mitigation instruments; structured finance mechanisms and non-financial tools. Each of these tools has the potential to address one or more of the barriers currently hindering climate investments in Africa.

This paper is part of The State of Climate Finance in Africa series from Climate Policy Initiative, The Children’s Investment Fund Foundation, and FSD Africa. The Landscape of Climate Finance in Africa report will be published later this summer.

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As COP27 Looms, Africa Receives a 10th of Climate Financing It Needs

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As the international climate community prepares to descend on Sharm el-Sheikh in Egypt, new analysis shows just how far off their host continent is in terms of attracting the finance it needs to adapt to catastrophic global warming, build renewable energy plants and enhance its carbon-absorbing ecosystems.

At $30 billion, annual climate finance flows in Africa are just 11% of the $277 billion needed, according to research published Wednesday by the Climate Policy Initiative, a US-based nonprofit. The research was commissioned by FSD Africa, an organization funded by the UK government, the Children’s Investment Fund Foundation, a charity set up by billionaire hedge fund activist Christopher Hohn, and UK Aid. It’s the first to map climate finance flows in Africa by region, sector and source, and captures available data for 2019 and 2020.

Top of the agenda at the November UN climate summit in Egypt, known as COP27, will be demands from developing nations for more funding from rich countries to adapt to global warming and a financing mechanism to help them cope with natural disasters and extreme weather events. In 2009, developed countries committed to $100 billion of assistance for poorer nations every year. They have fallen significantly short of that target.

Africa accounts for a tiny fraction of the world’s carbon emissions but its nations will be among the hardest hit by global warming, already manifested globally in disasters ranging from heat waves in Europe to droughts in the Horn of Africa and floods in Pakistan.

“A report such as this allows us to measure whether the commitments of developed countries to provide finance to developing countries, is indeed being delivered,” said Valli Moosa, deputy chairman and effective head of South Africa’s Presidential Climate Change Coordinating Commission, in a statement.

Private sector finance in particular remains too low, the Climate Policy Initiative said in the report. Companies and commercial financial institutions contributed just 14% of total climate finance received in Africa, much lower than in other developing regions.

What on Earth?What on Earth?What on Earth?The Bloomberg Green newsletter is your guide to the latest in climate news, zero-emission tech and green finance.The Bloomberg Green newsletter is your guide to the latest in climate news, zero-emission tech and green finance.The Bloomberg Green newsletter is your guide to the latest in climate news, zero-emission tech and green finance.

Existing flows are highly concentrated, with 10 of the 54 countries on the continent accounting for more than half of Africa’s climate finance. These include Egypt, Morocco, Nigeria, Kenya, Ethiopia and South Africa. The Southern African region bears the largest financing gap in absolute terms, attributed by the researchers to the $107 billion annual needs of South Africa alone, combined with one of the lowest regional levels of climate investment. As a percentage of gross domestic product, countries in Central and East Africa face the largest investment gaps.

Investment Opportunities

South Africa, the continent’s most industrialized nation, is transitioning from reliance on coal for more than 80% of its electricity to renewable energy, meaning that billions of dollars will need to be spent on new power plants and an expanded electricity grid.

“Public and private actors must act with scale and speed to help bring Africa’s climate goals to fruition,” said Barbara Buchner, global managing director of the Climate Policy Initiative. “Africa offers a wealth of climate-related investment opportunities” and “the social, economic, and environmental benefits which could be realized are even greater,” she said.

Those investment opportunities are spread across a number of sectors, including clean energy plants and agribusiness. Annual investment in renewable power stands at just 7% of the $133 billion that the International Energy Agency estimates African countries need to meet their 2030 energy and climate goals, according to the research. Agriculture and forestry investments are also falling short of financing needs.

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Venture funds flowing into Africa’s climate change businesses

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Summary

  • Several venture capital firms are actively hunting startups while others are building up their war chests to capitalise on existing opportunities – including the take-over of successful and promising energy startups.

Nairobi. Startups working to mitigate climate change in Africa have caught the eye of investors as venture funds flow into technology that could shape the future of energy on the continent.

Investment into African tech startups that focus on mitigating climate change is beginning to rise, following a global trend – albeit at much lower valuations than elsewhere.

Since the start of the year, green tech startups offering solutions that help countries keep to the Paris Agreement’s goal of limiting global warming to below 1.5 degrees Celsius have attracted growing investor interest.

Several venture capital firms are actively hunting startups while others are building up their war chests to capitalise on existing opportunities – including the take-over of successful and promising energy startups.

The recent acquisition of Ghana-based solar energy startup, PEG Africa, by UK-based power company, Bboxx is among the most significant deals in this vertical, so far.

PEG, with a pay-as-you-go solar home system, has a customer reach of one million. The company, already present in Senegal, Ghana, Mali and Ivory Coast, is served by over 500 employees in 100 centres. Reports value the deal at US$ 200 million.

“The agreement was closed on 6th September 2022. Financials have not been disclosed,” said Bboxx in a statement.

Following the deal, the two became the fastest-growing clean energy firms on the continent, with a combined customer base of 3.5 million across 10 African countries.

Canadian investor FinDev Canada pumped US$ 13 million into the Energy Entrepreneurs Growth Fund (EEGF) in January. EEGF invests in early and growth-stage energy startups in sub-Saharan Africa.

The fund – founded by oil marketer Shell – seeks to increase access to clean energy for households and off-grid businesses in the region.

Two months ago, Africa’s Climate Venture Builder, Persistent Energy, closed a $10 million series C funding round to strengthen its team and scale climate activities in Africa. It said the funding has the potential to improve 2 million lives, create 6,000 green jobs and cut 700,000 tonnes of carbon emission.

“By leveraging powerful partnerships, we will be able to accelerate our most pioneering venture building investments, driving the transition to clean energy, promoting e-mobility and finding innovative business models and technological developments across the continent,” said Persistent Managing Partner, Tobias Ruckstuhl.

Over the last two decades, Persistent has engaged in 22 early-stage investments in pay-as-you-go- solar home systems, commercial and industrial solar, as well as e-mobility players including Kenya’s e-mobility startup, Ecobodaa.

Boston-based venture accelerator, Catalyst Fund has announced plans to begin funding Fintech and climate resilience startups in Africa starting October 2022.

“We are actively looking for early-stage startups that improve the resilience of underserved and climate-vulnerable communities in emerging markets. Our next cohort will kick off in October 2022,” announced the venture firm.

It is looking for startups offering solutions in recycling, sustainable agriculture, carbon credits and sustainable utilities like water management and clean energy. Already, the fund has received $3.5 million from FSD Africa to support these initiatives.

Research firm Magnitt, shows energy startups raised hundreds of millions of dollars in the first half of 2022. Africa energy startups drove 67 percent of this capital.

A comparative report, State of Climate Tech 2021 by advisory firm PwC also highlights the growing attractiveness of the sector across the globe.

According to the report, investments in climate tech surged in the first half of 2021, to US$ 87.5 billion globally, from a low of US$ 28 billion in the second half of 2020.

“Though this area presents a major commercial opportunity, due to the inherent value associated with reducing emissions, there is still much work to be done to channel this investment appropriately,” said PwC researchers.

US climate tech firms raised the largest share (US$ 56.6billion), followed by Europe and China (US$ 18.3 billion and US$ 9 billion respectively). Most of this capital funding growth targetted electric vehicles.

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Green tech startups in Africa are attracting investor interest

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This article was submitted to TechCabal by Conrad Onyango, bird story agency*

Investment into African tech startups that focus on mitigating climbing change is beginning to rise, following a global trend – albeit at much lower valuations than elsewhere.

Since the start of the year, green tech startups offering solutions that help countries keep to the Paris Agreement’s goal of limiting global warming to below 1.5 degrees Celsius have attracted growing investor interest.

Several venture capital firms are actively hunting startups while others are building up their war chests to capitalise on existing opportunities – including the take-over of successful and promising energy startups.

The recent acquisition of Ghana-based solar energy startup, PEG Africa, by UK-based power company, Bboxx is among the most significant deals in this vertical, so far.

PEG, with a pay-as-you-go solar home system, has a customer reach of one million. The company, already present in Senegal, Ghana, Mali and Ivory Coast, is served by over 500 employees in 100 centres. Reports value the deal at US$ 200 million.

“The agreement was closed on 6th September 2022. Financials have not been disclosed,” said Bboxx in a statement.

Following the deal, the two became the fastest-growing clean energy firms on the continent, with a combined customer base of 3.5 million across 10 African countries.

Canadian investor FinDev Canada pumped US$ 13 million into the Energy Entrepreneurs Growth Fund (EEGF) in January. EEGF invests in early and growth-stage energy startups in sub-Saharan Africa.

The fund – founded by oil marketer Shell – seeks to increase access to clean energy for households and off-grid businesses in the region.

Two months ago, Africa’s Climate Venture Builder, Persistent Energy, closed a US $ 10 million series C funding round to strengthen its team and scale climate activities in Africa. It said the funding has the potential to improve 2 million lives, create 6,000 green jobs and cut 700,000 tonnes of carbon emission.

“By leveraging powerful partnerships, we will be able to accelerate our most pioneering venture building investments, driving the transition to clean energy, promoting e-mobility and finding innovative business models and technological developments across the continent,” said Persistent Managing Partner, Tobias Ruckstuhl.

Over the last two decades, Persistent has engaged in 22 early-stage investments in pay-as-you-go- solar home systems, commercial and industrial solar, as well as e-mobility players including Kenya’s e-mobility startup, Ecobodaa.

Boston-based venture accelerator, Catalyst Fund has announced plans to begin funding Fintech and climate resilience startups in Africa starting October 2022.

“We are actively looking for early-stage startups that improve the resilience of underserved and climate-vulnerable communities in emerging markets. Our next cohort will kick off in October 2022,” announced the venture firm.

It is looking for startups offering solutions in recycling, sustainable agriculture, carbon credits and sustainable utilities like water management and clean energy. Already, the fund has received US $ 3.5 million from FSD Africa to support these initiatives.

Research firm Magnitt, shows energy startups raised hundreds of millions of dollars in the first half of 2022. Africa energy startups drove 67 percent of this capital.

A comparative report, State of Climate Tech 2021 by advisory firm PwC also highlights the growing attractiveness of the sector across the globe.

According to the report, investments in climate tech surged in the first half of 2021, to US$ 87.5 billion globally, from a low of US$ 28 billion in the second half of 2020.

“Though this area presents a major commercial opportunity, due to the inherent value associated with reducing emissions, there is still much work to be done to channel this investment appropriately,” said PwC researchers.

US climate tech firms raised the largest share (US$ 56.6billion), followed by Europe and China (US$ 18.3 billion and US$ 9 billion respectively). Most of this capital funding growth targetted electric vehicles.

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Africa’s climate finance must hit $277bn to meet 2030 goals – Study

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If Africa is to meet its 2030 climate goals and implement the Nationally Determined Contribution (NDCs), climate finance on the continent must hit $277 billion, a new study on the Landscape of Climate Finance in Africa says.

The study, commissioned by the Financial Sector Deepening Africa, the Children’s Investment Fund Foundation, and UK Aid finds that total annual climate finance flows in Africa – both domestic and international was $30 billion, which is just 11 percent of the needed $277 billion.

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How to fund sustainable growth in Africa

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‘How to fund sustainable growth in Africa’ was a recent event held at London Business School’s Sammy Ofer Centre by the Royal African Society (RAS) and Standard Chartered which saw Bill Winters, CEO of Standard Chartered, in conversation with Arunma Oteh, OON, Chair of the RAS, about how to fund sustainable growth in Africa. The event was supported by London Business School’s Wheeler Institute for Business and Development and the LBS Africa Club.

The issue of sustainable growth is a significantly important topic for investors, banks and corporates around the world. Promoting sustainable finance to emerging economies is a growing priority for the global investment community, bringing together public and private sectors to ignite and grow climate and environmental finance, promote good governance, and support broader development goals. Standard Chartered Bank’s CEO Bill Winters addressed these issues and more on 5 October, and later engaged in discussion Royal African Society Chairperson Arunma Oteh.

Africa’s massive financing gap

The UN’s Economic Report on Africa 2020 estimated that the continent needed about $1.3tn a year to achieve the Sustainable Development Goals (SDGs) by 2030, a figure that could increase by 50% to $19.5tn as a result of population growth. A more recent report by Climate Policy Initiative (CPI), funded by CIFF and FSD Africa, Climate Finance Needs of African Countries, has estimated that the cost of implementing the continent’s NDCs (nationally determined contributions) under the Paris Agreement could be around $2.8tn between 2020 and 2030; the UN now estimates the figure to be over $3tn over the same period.

It is not fair or possible for Africa to meet these funding requirements. Africa accounts for only 2-3% of current global emissions (and about the same level of cumulative emissions) and yet is the continent most at risk from climate change. CPI’s report explains that African governments have committed $264bn of domestic resources for implementing NDCs, leaving a funding gap of $2.5tn. In comparison, the combined annual GDP across the continent is $2.4tn. If African countries were to fund the gap themselves, the annual expenditure of $250bn would more than double their combined spending on health. The CPI report notes, however, that “total annual climate finance flows in Africa, for 2020, domestic and international, were only $30bn, about 12% of the amount needed,” and that “most current climate financing in Africa is from public actors (87%).” In other words, there is a pressing need for much greater involvement of private finance in closing the funding gap.

Attracting private finance

For Standard Charters’ Bill Winters, there are three things that are required to access private finance at scale:

First, there needs to be continued development of a set of agreed standards against which to measure projects and their impacts. CPI’s report (cited above) emphasises the need to improve the quality and granularity of the data on the financing needs of each country, classifying them by economic sector and subsector and by public and private sources of finance.
Second, there needs to be a more effective model for public-private partnerships with MDBs (multilateral development banks). At present, there are two main challenges – the scale of MDB financing available and the ratio of private to public funds in the projects. Winters explained that MDBs currently contribute around $9bn annually (out of a total requirement of $1.3tn) and that for every 95c received from the World Bank only around $1 of private capital is contributed. When asked in the discussion’s Q&A session what he would do if he were newly elected president of a US MLB, he said he would ask his shareholders for at least a doubling of capital, request permission to increase funding for sustainable projects by fifteen times, and tell them that the expected loss on those projects would need to increase from approximately zero to 6-7%, the loss rate one would expect from a risky tranche of such projects. In this way, public financing would be catalysing, rather than substituting.
Finally, non-bank capital needs to be accessed at scale. With less than 2% of the AUM of the 300 largest asset managers targeted at Africa, there is scope for much greater involvement of private investors, but only if the products available can be standardised, understandable and rated.
The potential global benefits of Africa’s sustainable growth

A recent Standard Chartered report, Just in Time, has estimated that developing markets, of which Africa represents a large proportion, need $95tn between now and Net Zero. If the countries were to fund it themselves through taxation and borrowing, it could reduce household consumption by an estimated 5% p.a. This would be an especially unfair burden, given Africa’s low contribution to global emissions. If funded by public and private capital from developed countries, on the other hand, GDP could be increased by 3.1% in emerging markets and 2% worldwide (equivalent to $108tn to 2060). This would represent a welcome contribution to global growth in the mid-21st century.

Net Zero and Africa’s energy policy

During a Q&A session moderated by Arunma Oteh, Winters was asked about how the drive for Net Zero would affect the nearly 800 million people with no access to electricity, many of whom are in countries looking to increase the levels of emissions-generating industrial, educational and urban activities as part of their growth agendas. Winters acknowledged that Africa’s power deficit was enormous and that a just transition must be central to any successful sustainability action, and he accepted that the strong economic growth that was on offer would also entail a rise in emissions, before a reduction. But, given the target of a 45% reduction in emissions by 2030, he hoped that big investments in better power, manufacturing and agriculture would be made now. When asked specifically about natural gas, Winters explained that – as in the IEA’s likely scenario – gas usage would increase due to underlying growth and would represent an essential transition fuel for the continent.

COP26 and the Taskforce on Scaling Voluntary Carbon Markets

When reflecting on COP26, Winters felt that notable successes had been achieving greater involvement of the private sector, developing a clearer model for public-private relationships (and in the process overcoming some initial antagonism between the parties) and establishing good frameworks for measurement and assessment. One of the areas in which he felt there was more to do was Article 6 on market mechanisms and non-market approaches. COP26 saw the adoption of guidance, rules, modalities and procedures to be overseen by a Supervisory Board, and the introduction of instruments (ITMOs) similar to carbon credits in the voluntary carbon markets, but there remain some areas to clarify around past credits and the potential for double counting, amongst others.

Winters was then asked about his role as Chair of the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), the private sector-led initiative working to scale an efficient and effective voluntary carbon market. He explained that it contains 450 members from a range of fields – NGOs, academia, private sector actors, including emitters, and intermediaries – who are seeking to get tens or hundreds of millions of dollars into environments at risk and to incentivise the development of carbon-reducing technologies that would otherwise lack investment. The first focus of these activities has been the Amazon, the Congo Basin and the Indonesian rainforests, currently home to the world’s largest existing carbon sinks.

Looking ahead to COP27

Oteh then asked Winters about his thoughts on COP27 and what his criteria for success would be for that meeting. He hoped to see ongoing focus on public-private partnerships, that is, an acknowledgement that the problem was too large to be solved by either party alone. Then he asked for greater specificity in the definitions in Article 6 about how national accounting reconciles to carbon markets. Finally, he said that governments had to deliver the funds they promised, if they were to have any chance of catalysing private sector financing in the volumes required.

Overall, Winters was positive that the required momentum was building behind this issue. As we look forward to COP27 and think about Africa’s journey towards sustainable growth, both he and Oteh were optimistic that Governments and MDBs can catalyse private sector finance to enable a just transition top Net Zero on the continent. We will be watching COP27 to see whether these hopes are realised.

This event was curated by the Royal African Society (RAS) and Standard Chartered and supported by the Wheeler Institute for Business and Development and the LBS Africa Club.

David Jones MBA 2022 is a Classics graduate and has worked as a teacher in Malawi, an accountant at Deloitte and in the finance function at the Science Museum in London. He completed an internship with the Wheeler Institute’s Development Impact Platform in Zambia over summer 2021 and is now continuing as an intern for the Wheeler Institute, contributing to the creation of content that amplifies the role of business in improving lives.

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FSD Africa Announces Arunma Oteh as Board Member

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FSD Africa has announced that the former Director General of the Securities and Exchange Commission (SEC) Nigeria Arunma Oteh, has joined its Board of Directors to support the organisation as it works to strengthen and deepen Africa’s financial markets, particularly in the area of green finance.

FSD in a statement noted that Arunma is passionate about the role of financial markets in catalysing Africa’s success.

Commenting on the announcement, FSD Africa Chairperson, Dr. Frannie Léautier, said: “I am thrilled to have such a highly experienced and qualified person join our Board of Directors. Arunma’s detailed knowledge of global economics and the African financial sector will be invaluable to our organisation as we continue our efforts to improve access to capital and climate financing across the continent. I would like to extend a very warm welcome to Arunma and look forward to working with her.”

On her part, Arunma Oteh said: “FSD Africa is doing incredibly important work across the African continent. Ensuring reliable and self-sufficient financial markets is essential to ensuring sustainable growth and FSD Africa’s programmes and research are at the forefront of addressing this gap. As someone who has worked in this sector my entire career, I understand the immense value of financial markets. I am also delighted to contribute my expertise to guiding FSD Africa in its unique contribution to Africa’s economic development.”

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Why governments should deepen domestic financial markets

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To understand the challenges to debt sustainability and financial market development posed by Covid-19 and the war in Ukraine, FSDA recently completed a study of the experience of five case-study countries: Ethiopia, Ghana, Kenya, Nigeria, and South Africa.

Chronic fiscal and current account imbalances had arisen well before the Covid-19 pandemic, already severely hampering the ability of country authorities to respond to unexpected shocks.

Counter-cyclical fiscal measures in response to Covid-19 then led to the accumulation of even higher levels of public debt. Even though all countries are exposed to liquidity and solvency risks, debt simulations show that the most important risk to be monitored is the risk of external debt distress.

The availability of foreign exchange required to fund current account deficits and the servicing of external debt is constrained by low public sector revenues and large trade deficits. Prospects for alleviating such liquidity pressures in the short to medium term are limited, as they depend on structural changes aimed at reducing current account deficits.

Indeed, it is anticipated that these pressures will become even more acute in 2022/2023 due to rising interest rates on external borrowing. With the tightening of credit markets worldwide and yields at historically high levels, Ghana, Kenya and Ethiopia are particularly exposed, as they face sizable refinancing risks on their Euro-borrowing.

Nigeria and South Africa are in a less precarious situation than the other three countries. Nigeria entered the Covid-19 crisis with a lower level of public debt while South Africa’s deep domestic financial market makes it possible to absorb higher levels of public debt. However, even with its more developed taxation system, South Africa is also exposed to liquidity risk, as reliance on foreign portfolio investment in domestic government debt exposes South Africa to risk, due to the ‘vagaries’ of foreign portfolio investors.

Table 1 below gives an overview of the gravity of the liquidity and solvency risks facing the five-country case studies explored in this paper:

Colours: Red-very urgent Yellow-urgent Green-relatively urgent.

In responding to the Covid-19 pandemic, governments adopted a combination of policy responses to mitigate the negative impact of increased government borrowing: (a) reducing policy interest rates, (b) central bank purchases of long-term government bonds and sale of short-term securities (quantitative easing) in Ghana and South Africa, (c) drawing on central bank overdraft facilities or financing government expenses by issuing securities directly to the central bank (debt monetisation) in Ethiopia, Nigeria and Ghana; and (d) relying on financial repression measures, such as foreign exchange controls, payment of negative real interest rates on government securities, and the imposition of investment requirements on banks and institutional investors in Ethiopia and Nigeria.

Increased domestic borrowing

Since it is very unlikely that governments will implement required fiscal consolidation measures in the near term, it is expected they will need to resort to increased domestic borrowing, and under current macroeconomic circumstances, increased reliance on government debt issuance is likely to put upward pressure on the yield of government securities, thereby crowding out the supply of credit to the private sector.

Under these circumstances policies designed to increase the absorptive capacity of domestic securities, and markets have an important role to play. Debt managers can contribute to this process by ensuring that debt instruments are best tailored to the needs of the domestic and external investor base.

It is in this context that it is important that countries, such as Nigeria and Ethiopia, cease central bank financing of government deficits

Equally important is that domestic money and primary markets have sufficient depth to absorb liquidity shocks as well as the issuance of large volumes of government securities on the primary market.

The more debt issuance by the government is tailored to meeting the needs of a diversified institutional investor base – both the needs of domestic investors and foreign portfolio investors buying domestic securities the needs of foreign investors buying securities issued by the government externally (on the Euro-market) – the more government debt financing costs will be shielded from sudden changes in market sentiment.

Risks and challenges

Nonetheless, the deepening of domestic financial markets presents risks and challenges. Not only will the authorities need to demonstrate their commitment to market-conform policies – aborting policies such as financial repression and excessive monetary financing – but they will also need to prioritise the management of public debt with a view to fostering market development and minimising crowding out that reduces the availability and raises the cost of private sector credit.

There is evidence that, in the short term, increasing the supply of government securities tends to put upward pressure on the sovereign yield curve, thereby raising the cost of borrowing both to the government and the private sector. Increases in the sovereign credit risk premium will also tend to raise the cost of capital for private issuers.

It is in this context that it is important that countries, such as Nigeria and Ethiopia, cease central bank financing of government deficits both to lessen inflationary pressures and to re-confirm commitment to the primary mandate of central banks in controlling inflation.

Even though financial repressive policies, such as requiring investors (banks and institutional investors) to purchase government securities used in Ethiopia and exchange controls as relied upon by Nigeria and Ethiopia may curb the growth of public debt in the short term, they discourage the formation of savings and encourage financial disintermediation in the medium term.

By lessening market responses or introducing market distortions, repressive financial policies reduce immediate responses to shocks in terms of market signals, but at the cost of reducing confidence in market-based finance. Over time, such distortions undermine the role of financial markets in allocating scarce resources to their optimal uses and may be difficult to unravel, as they are associated with opportunities for rent-seeking

Short-term tension

Nonetheless, in making these recommendations, it is important to recognise that adoption of policies designed to support market development will give rise to tradeoffs. In the short term, there are tensions between the gains associated with market development and fiscal costs and risks.

Policies like discontinuing financial repression and refraining from monetary financing while supportive of the financial market development will oblige the governments to find alternative funding sources. Such short-term costs may hamper the authorities’ willingness to implement policy reforms, even when the benefits associated with fostering financial market development, particularly in terms of enhancing the sustainability of the government’s debt, substantially outweigh the costs in the medium to longer term.

Implementing the conditionalities associated with debt relief negotiations more effectively than in the past will be important

In addition, authorities may be hesitant to undertake the transition towards more market-conform financing of their fiscal deficits, as the transition will inevitably raise awareness, transparency, and accountability regarding their funding.

Going forward, implementing the conditionalities associated with debt relief negotiations more effectively than in the past will be important in avoiding a situation where the benefits of debt relief once again only remain temporary. Anticipated external debt levels pose a threat to debt sustainability in four case-study countries, and in the case of South Africa, foreign portfolio investment poses a risk to macroeconomic stability.

Short-lived efforts

Previous attempts to ease the adjustment process and at the same time provide the opportunity for market development have involved debt relief and increased access to external concessional financing. Such debt relief efforts have been accompanied by conditionalities designed to put countries on a path of fiscal consolidation and stabilisation of their external debt positions aimed at ensuring debt sustainability in the future.

However, as documented in this paper, the outcomes of efforts to avoid future debt accumulation and the dangers to debt sustainability were short-lived. Although well-intentioned, these efforts failed to resolve macroeconomic imbalances, and countries were ill-prepared to meet recent shocks.

Table 2 provides an assessment of the severity of the policy challenges faced by the five case-study countries in addressing fiscal imbalances and supporting market development.

Colours refer to the degree of urgency in implementing the reforms: relatively urgent, urgent, and very urgent.

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